Amidst a row over doubling ofnatural gas prices, oil minister M Veerappa Moily today said a double digit rate will halve the demand for environment- friendly fuel in the country.

Amidst a row over doubling ofnatural gas prices, oil minister M Veerappa Moily today said a double digit rate will halve the demand for environment- friendly fuel in the country.

The share of natural gas in the total energy consumption in the country is projected to nearly double from existing 11 per cent to 20 per cent by 2025, he said in his keynote speech at the 2nd LNG Producer-Consumer Conference in Tokyo.

Quoting a recent study on the gas sector, he said total gas demand would be around 260-350 million standard cubic metres per day if the city gate or delivered gas prices are $5.8-6.5 per million British thermal unit.

Currently most of the gas produced in India is sold at $4.2 per mmBtu at well-head and delivered price is up to $6.5, at rate which generates an additional demand of 204 mmscmd over and above present consumption of 145.7 mmscmd.

"In case the prices rise to $10-12 per mmBtu, potential domestic gas demand would be lower at around 180 mmscmd, generating additional demand of only 72 mmscmd, whereas at prices above $12 and up to $18 per mmBtu, the potential demand would be limited to 38 mmscmd only," he said. The Government had in late June approved pricing of all domestically at an average of international hub rates and cost of imported LNG, which will translate into a wellhead price of $8.4 per mmBtu when implemented in April 2014. The delivered price will be over $10. The gas price hike has not just been opposed by user industries, a petition has also been filed in the Supreme Court saying the rate increase was to benefit only a single corporate.

"On the supply side, India has large proven reserves of gas that remain unexploited. While the total proven reserves are 1.3 trillion cubic metres (tcm), what is currently exploited is only 0.04 tcm, which gives a production to reserve ratio of 1:33," Moily said.

Stating that investors had been expressing concerns about low price of gas in the country, he said the the Government had recently decided to raise the price of domestically produced gas, effective from 1st April 2014.

"This would certainly make India an attractive destination for investment in the sector," he said.

Gas demand in India, he said, is projected to rise by 94 per cent over the period 2012-17 with compounded annual growth rate of 14.2 per cent, whereas production is expected to rise only by 66 per cent during the same period.

Moily said the LNG prices in the Asia-Pacific region are significantly higher than that in North America and UK/Europe.

"This is in spite of the fact that the Asia-Pacific region is the largest consumer of LNG globally, accounting for 66 per cent of the global consumption and also hosts the major producers of LNG.

"This unreasonable burden on the buyers of the Asia-Pacific region is the 'Asian Premium'. We don't find any rationale for such a premium now," he said.

"High prices in the region would benefit neither the buyers nor the producers/suppliers. If this trend continues, there is no doubt that demand would drift away from LNG to other competing fuels," Moily said. The price of a commodity should reflect the demand-supply dynamics of the commodity in the markets where it is traded.

Between markets, the price differential should reflect only the transport and other logistics costs involved. This was not the case in the Asia-Pacific region. "The practice of the 'oil linkage' that has no more relevance or rationale today, is still continuing in gas pricing in the region and is largely responsible for such abnormally high prices," he said adding the transition away from 'oil price indexation' was a necessary precondition for a competitive market to evolve in the Asia Pacific region.

"To evolve a market governed by fairness and transparency, there is need to evolve a suitable reference price in the region, reflecting supply-demand fundamentals therein. "Obviously, the creation of a reference price and a more integrated market for LNG necessitates a collective effort from the buyers and sellers across the LNG markets, and particularly in the Asia Pacific region," he said. Moily said the share of Asia-Pacific region in the global consumption of gas which was 18.8 per cent in 2012.

As there is limited inter-country pipeline infrastructure (8 per cent of global pipeline trade) in the region, about 80 per cent of gas trade in 2012 was in the form of LNG. As a result, while LNG trade accounted for a mere 32 per cent of total global natural gas trade, the region accounted for about 69 per cent of global LNG trade.

"I feel that the traditional system of LNG trade is under challenge. For example, traditional long-term LNG contracts are gradually being supplemented by short term or spot LNG transactions that are more flexible in timing and location," he said. These transactions are starting to serve as transmitters of price signals between regional gas markets. Besides, the advent of unconventional gas sources like shale gas and Coal Bed Methane (CBM) foretell important structural changes that are on in the market. This trend can only predict a fall in LNG prices in the coming days.